John Is Trying to Decide Whether to Expand His Business

question 19

Multiple Choice

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.John decides to expand. Which of the following is true?

• A)John's expected revenue is $50,000 less than it would have been if he didn't expand.
• B)John will earn $120,000 more revenue, but this amount is less than the cost of expansion.
• C)John will earn $120,000 more revenue and therefore made the most profitable decision.
• D)All of these statements are true.

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Definitions:

Shareholders' Stake

The interest or share that an individual has in a company as determined by the number of shares owned.

Financial Report

A formal record of the financial activities and position of a business, person, or other entity, often audited and presented in a structured manner.

Balance Sheet

A financial statement that shows what the company owes, what it owns, including the shareholder’s stake, at a particular point in time.

Cash Conversion Cycle

A metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.